Troubled Euro Nations Face Rising Borrowing Costs

4/24/2012 7:31 AM ET

Spain and Italy continued to face rising borrowing costs at debt auctions on Tuesday as investors were increasingly concerned over the economic outlook of these euro area nations. That said, the nations were successful in raising debt closer to the upper end of their targeted amount.

Elsewhere, the Netherlands saw a successful debt sale despite the collapse of the country's government on Monday on its failure to agree on budget cuts.

The Spanish Treasury raised EUR 1.9 billion of treasury bills against the target of EUR 1 billion to EUR 2 billion set for the sale.

The agency sold EUR 725 million of the 3-month paper at an average yield of 0.634 percent, which was higher than 0.381 percent at an auction on March 27. The bid-to-cover ratio, which indicates demand, rose to 7.6 from 3.5.

The country also placed EUR 1.2 billion 6-month debt at an average yield of 1.580 percent, up from 0.836 percent paid in March. Demand was 3.25 times the offer, down from 5.6 in the previous sale.

Spain's economic outlook has turned increasingly worrying. Yesterday, the Bank of Spain said the economy slipped back into recession in the first quarter of 2012, fueling concerns that the country may fail to meet the deficit targets, which may force the government to seek an international bailout.

The International Monetary Fund cut Spain's outlook last week. The economy is expected to contract 1.8 percent, slightly worse than the 1.7 percent contraction seen earlier. In 2013, the economy is expected to grow by 0.1 percent.

On March 2, Spanish Prime Minister Mariano Rajoy said the country's budget deficit would be 5.8 percent of GDP in 2012, higher than the agreed target of 4.4 percent. After consultations with the EU, Rajoy agreed to set the target at 5.3 percent of GDP.

The country's 10-year borrowing costs surged to over 6 percent last week, close to levels widely seen as unsustainable. After falling back moderately last week, the yields on Spain's 10-year bonds rose again on Monday.

Meanwhile, the Italian Treasury sold EUR 2.5 billion of its January 2014 zero coupon bond or CTZ at an average yield of 3.355 percent, up from 2.352 percent paid at the previous sale on March 27.

The agency planned to raise between EUR 1.5 billion and EUR 2.5 billion. The bid-to-cover ratio fell to 1.80 from 1.86.

The treasury also sold two types of inflation-linked bonds, raising as much as EUR 943 million. The agency was targeting proceeds between EUR 500 million and EUR 1 billion.

The yield on the 2019 bond was 4.32 percent, while that on the 2017 debt was 3.88 percent. Demand was 2.24 times the offer for the 7-year debt, while investors bid 2.13 times for the 5-year bond.

Last week, the government led by Prime Minister Mario Monti raised the budget deficit forecast for 2013 to 0.5 percent of gross domestic product from 0.1 percent previously. The government also announced a 2-year delay in its earlier aim to achieve a balanced budget by 2013.
Monti also cut the economic outlook for this year. The Italian economy is now expected to contract 1.2 percent, which is worse than the previous forecast for at least a 0.4 percent shrinkage.

Meanwhile, the Dutch State Treasury Agency raised EUR 1.995 billion from the sale of it 2- and 25-year bonds. The agency had planned proceeds between EUR 1.5 billion and EUR 2.5 billion.

The 3.75 percent July 2014 bond was placed at an average yield of 0.523 percent. The 4 percent January 2037 bond was sold at a yield of 2.782 percent. Previous taps in these lines were held few years back.

On Monday, the Liberals-led minority government in the Netherlands collapsed as Prime Minister Mark Rutte resigned after coalition talks on reducing the country's budget deficit to meet European guidelines failed to reach an agreement.

A parliamentary debate to discuss the political crisis, the interim budget cuts and a schedule of snap polls is expected to take place on Tuesday, and Rutte is due to address the parliament in the afternoon.

The Netherlands has been asked to submit its budget measures to the European Commission by April 30, but it is not sure if the caretaker government can pass legislation concerning European issues with the support of the opposition.